How To Trade Consolidation Phase
There are various strategies to trade top gainer and top loser stocks, like Fibonacci retracements, flags/pennants etc. One of them is Break of Consolidation Phase. We might have seen many times in top gainer and top loser stocks that after making higher highs or lower lows they go resting which can also be described as period of indecision. As a trader we always look out for patterns, their breakouts/ breakdowns. However, we sometime fail to recognize consolidation phases and miss good trades on it.
A stage in the trend when stock takes rest after producing higher highs and produces sideways movement with prices remain intact near high/low of the day for gainers/loser respectively. These consolidation pattern can be found in any timeframe, as an intraday trader we can follow 5min or 15min charts for taking any kind of position.
Support & Resistance
For Gainer Stocks, the high of higher high candles become resistance and low of the consolidation range becomes support, where for Loser Stocks, the low of the lower low candles becomes support and high of consolidation range becomes resistance, Once the price breaks either of these with good volume, volatility quickly increases where we can take our trades. This break can be identified through volume or through the candle itself which we will discuss below.
Timing the Perfection
In Indian stock market, it is generally observed that consolidation phase occurs during all three sessions of the day, for our simplicity we will divide the day into session.
- Morning Session (9.15 AM – 10.45 AM)
- Mid Session (11AM – 12.30PM)
- Afternoon Session (12.30PM – 3.30PM)
The purpose of dividing the day into 3 session is very simple, you will more often identify atleast one consolidation phase towards the end of each session which might break at the start of next session.
How to Trade
Following is a typical morning session graph for Top Gainer Stock, as one can see scrip has made higher highs and then goes into consolidation phase and remains within specified range, say price has been dipped by 2 points. The best time to enter into such scrip is when one big candle forms which covers the whole 2 points drop (ie Single candle covers all the dip in prices during consolidation phase) as shown in following figure. At this point we can enter into the trade. Same figure can be applied for mid and afternoon sessions.
With experience one can buy/sell into such gainer and loser stocks at consolidation phase support/resistance respectively.
IGL on 28th September 2017 (15min Chart)
CIPLA on 28th September 2017 (15min Chart)
CIPLA on 28th September 2017 (5min Chart)
ESCORTS on 29th September 2017 (15min Chart)
Based on above examples and theory, one can practice this kind of trading over number of top gainer and loser stocks. While practicing keep in mind the time of breakouts, that will help you out in your future trades.